"Unrestrained financial exploitations
have been one of the great causes of our present tragic condition."

--
President Franklin D. Roosevelt, 1933

Why did gold and silver stocks just get hammered, at a
time when commodities are considered a safe haven against widespread global
uncertainty? The answer, according to
Bill Murphy's newsletter LeMetropoleCafe.com,
is that the sector has been the target of massive short selling. For some popular precious metal stocks, close
to half the trades have been "phantom" sales by short sellers who did not
actually own the stock.

A bear raid is the practice of targeting a stock or
other asset for take-down, either for quick profits or for corporate
takeover. Today the target is commodities,
but tomorrow it could be something else.
When Lehman Brothers went bankrupt in September 2008, some analysts
thought the investment firm's condition was no worse than its
competitors'. What brought it down was
not undercapitalization but a massive bear raid on 9-11 of that year, when its
stock price dropped by 41% in a single day.

The stock market has been plagued by these speculative attacks
ever since the four-year industry-wide bear raid called the Great Depression, when
the Dow Jones Industrial Average was reduced to 10 percent of its former value. Whenever the market decline slowed,
speculators would step in to sell millions of dollars worth of stock they did
not own but had ostensibly borrowed just for purposes of sale, using the device
known as the short sale. When done on a
large enough scale, short selling can force prices down,
allowing assets to be picked up very cheaply.

Another Great Depression is the short seller's dream, as a trader
recently admitted
on a BBC interview. His candor was
unusual, but his attitude is characteristic of a business that is all about
making money, regardless of the damage done to real companies contributing real
goods and services to the economy.

How the Game Is
Played

Here is how the
short selling scheme works: stock prices are set by traders called "market
makers," whose job is to match buyers with sellers. Short sellers willing to sell at the market
price are matched with the highest buy orders first, but if sales volume is
large, they wind up matched with the bargain-basement bidders, bringing the
overall price down. Price is set by
supply and demand, and when the supply of stocks available for sale is
artificially high, the price drops. When
the bear raiders are successful, they are able to buy back the stock to cover
their short sales at a price that is artificially low.

Today they only
have to trigger the "stop loss" orders of investors to initiate a cascade of
selling. Many investors protect
themselves from sudden drops in price by placing a standing "stop loss" order,
which is activated if the market price falls below a certain price. These orders act like a pre-programmed panic
button, which can trigger further selling and more downward pressure on the
stock price.

Another
destabilizing factor is "margin selling": many speculative investors borrow
against their holdings to leverage their investment, and when the value of
their holdings goes down, the brokerage may force them to come up with
additional cash on short notice or else sell into the bear market. Again the result is something that looks like
a panic, causing the stock price to overreact and drop precipitously.

Where do the short sellers get the shares to sell into
the market? As Jim Puplava explained
on FinancialSense.com on September 24, 2011, they "borrow" shares from the unwitting
true shareholders. When a brokerage firm
opens an account for a new customer, it is usually a "margin" account--one that
allows the investor to buy stock on margin, or by borrowing against the
investor's stock. This is done although
most investors never use the margin feature and are unaware that they have that
sort of account. The brokers do it because
they can "rent" the stock in a margin account for a substantial fee--sometimes
as much as 30% interest for a stock in short supply. Needless to say, the real shareholders get
none of this tidy profit. Worse, they can
be seriously harmed by the practice. They
bought the stock because they believed in the company and wanted to see its
business thrive, not dive. Their shares
are being used to bet against their own interests.

There is another
problem with short selling: the short seller is
allowed to vote the shares at shareholder meetings. To avoid having to reveal what is going on,
stock brokers send proxies to the "real" owners as well; but that means there
are duplicate proxies floating around. Brokers
know that many shareholders won't go to the trouble of voting their shares; and
when too many proxies do come in for a particular vote, the totals are just
reduced proportionately to "fit." But
that means the real votes of real stock owners may be thrown out. Hedge funds may engage in short selling just to vote on
particular issues in which they are interested, such as hostile corporate takeovers. Since many shareholders don't send in their
proxies, interested short sellers can swing the vote in a direction that hurts
the interests of those with a real stake in the corporation.

Lax Regulation

Some of the damage caused by short selling was blunted by the Securities Act of 1933, which imposed
an "uptick" rule and forbade "naked" short selling. But both of these regulations have been
circumvented today.

The uptick rule
required a stock's price to be higher than its previous sale price before a
short sale could be made, preventing a cascade of short sales when stocks were
going down. But in July 2007, the uptick
rule was repealed.

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling WEB OF DEBT. In THE PUBLIC BANK SOLUTION, her latest book, she explores successful public banking models historically and (more...)